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May 4, 2010

U.S. Stocks Fall More Than 2%; European Markets Tumble

By Christine Hauer

(C) 2010 The New York Times

The euro fell sharply on Tuesday and major indexes in Europe and the United States tumbled as the sovereign debt crisis in Europe and the risk of contagion continued to hang over the market.

At the close, the Dow Jones industrial average was 225.06 points, or 2.02%, lower, at 10,926.77. The Standard & Poor's 500-stock index fell 28.66 points, or 2.38%, to 1,173.60, while the Nasdaq dropped 74.49 points, or 2.98%, to 2,424.25.

In London, the FTSE 100 declined 2.56% or 142.18 points, while the DAX in Frankfurt fell 160.06 points to 2.6%. In Paris, the CAC-40 dropped 139.17 points or 3.64%.

Although the 15 other countries in the euro zone and the International Monetary Fund had agreed to give Greece 110 billion euros ($144 billion) in aid over three years, traders said the austerity plan remained a hard sell. Hundreds of Greek demonstrators took to the streets on Tuesday to rail against tough new austerity measures aimed at helping the debt-ridden country stave off economic disaster.

One lingering question is whether the $144 billion is enough to settle Greece's problems and keep them from spreading.

Investors were also watching Spain and Portugal, which have both had their debt downgraded in the last week. Greek government debt fell Tuesday, with the yield on the 10-year benchmark bond rising 36 basis points to 8.8%. In a sign of spreading nervousness, Portuguese and Spain bond yields also rose Tuesday.

"If there are real sovereign debt risks in Spain that is an issue for all multinational banks," said Uri Landesman, president of Platinum Partners.

"What is going on in Europe is eventually going to result in defaults," said Jeffrey Saut, the chief investment strategist for Raymond James. "They Band-Aided over the situation, and I think it is going to be very bad for the European banking complex."

All of that has hurt the euro, which slipped 1.35% on Tuesday against dollar, trading at $1.3019. At one point, the euro slipped below $1.30.

"The impact of the potential contagion will continue to weigh on the euro in the near term," Moody's chief international economist, Ruth Stroppiana, said. "If the Greece situation does spread to Portugal, Spain and elsewhere in the euro zone then the euro would continue to fall. But the situation is still a very serious one."

Kevin Chau, a currency analyst with IDEAglobal, said the euro could go to $1.25 by the end of the summer, and that others have put it at $1.20.

"I think that it will continue to go down because the problems over in Europe and the structure of the euro is being questioned," Chau said. "The European members' will to make the euro work and this whole unity work, is being questioned because of what is going on with Greece."

The European debt crisis dominated Wall Street. Traders paid little attention to the latest economic reports, which both topped expectations. The Commerce Department said that orders to factories rose 1.3% in March, and the National Association of Realtors said its index of sales agreements for previously occupied homes rose a stronger-than-expected 5.3% in March.

M. Jake Dollarhide, chief executive of Longbow Asset Management, said the economy was one part of a "three-pronged monster" stirring up concern; the others being the unresolved Greek debt issue and a fear of terrorism that stemmed from the discovery over the weekend of a car bomb in Times Square.

"The third prong is just the fact that we have no achieved economic resurgence up to a level that makes people feel comfortable," Dollarhide said. "There are a lot of pressures, a lot of anxiety."

In the past several market days, the declines in the market have been followed by recoveries. But investors were not seeing today's lows as buying opportunities so far, he said.

Traders have also put the earnings season behind, which was highlighted by a string of stronger-than-expected results.

"Earnings season is pretty much in the rearview mirror," Saut said, "so you haven't got that to prop you up right now."

Financials were going to remain a concern, Landesman said, given the prospect of financial regulation and the accusations of trading fraud against Goldman Sachs. Shares of Goldman Sachs and most other major banks were lower Tuesday.

Technology shares were taking a dive. "Technology has had such a big run-up with Apple, and Nasdaq is under a lot of pressure today," Dollarhide said. Shares of Apple, Dell and Google were all down.

And energy shares slipped. Britain's main index was dragged down by BP and concerns about the costs that the oil company will face from the spill in the Gulf of Mexico. BP shares closed down 2.95% in London.

"The worst thing is when you can't really size a risk or a problem," Landesman said.

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